Category Archives: income tax advice

Cancellation of Debt… Income?

If you have had a lender discharge part or all of a debt that you were liable for, you may owe income tax on the amount that was discharged. This is because certain debts that are cancelled or forgiven by a lender result in taxable income to you, even though you have not technically received any money in hand from the debt forgiveness.

Generally, debt that is discharged or canceled by a lender must be included in your taxable income. Debt forgiveness income, or Cancellation of Debt (COD) income, is the product of the amount of debt that a lender discharges or cancels. Unless a specific exception applies, a lender’s cancellation of debt will generally result in income to the borrower. 

In general, if the amount forgiven or canceled is $600 or more, the lender must issue to you, and to the IRS, a Form 1099-C, Cancellation of Debt, showing the amount of debt canceled. Even though the creditor has issued Form 1099-C, you may be able to claim an exclusion from income for the canceled debt.

Exclusions from income. COD income is not always taxable.The most common situations in which cancelled debt does not result in taxable income include the following:

  • The debt has been discharged through a bankruptcy proceeding under Title 11
  • Insolvency (your total debts exceed your total assets)
  • Qualified principal residence debt (limited to $2 million, or $1 million for married taxpayers filing separately)
  • The debt is due to a qualified farm expense or farm property (“qualified farm debt”)
  • The debt is due to certain real property used in a trade or business (“qualified real property business debt”)

Other exclusions may apply to student loans, disaster victims, gifts, general welfare payments, and deductible payments.

Reduction of attributes. When canceled debt is excluded from income, the debtor may be required to reduce tax attributes, such as the basis of property. The reduction of attributes must be reported on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and included with your federal income tax return. If you do not reduce attributes, the IRS may take the position that you are taxable on the COD income.

Non-recourse loans. A non-recourse loan is a loan in which your lender‘s only remedy in case of default is to repossess the property subject to the loan. That is, property that is either being financed or used as collateral for the loan. In these cases, your lender cannot pursue you personally in case of default. Although forgiveness of a non-recourse loan resulting from a foreclosure does not result in COD income, it may result in other tax ramifications. 

Mortgage debt forgiveness. For a limited period of time, certain mortgage debt that is discharged by the lender is excludable from COD income and therefore does not result in taxable income to homeowners. This is generally referred to as “qualified principal residence debt.” The cancellation of qualifying mortgage debt is excludable from income if it is incurred with respect to the taxpayer’s principal residence for “acquisition” debt forgiven on or after January 1, 2007 and before January 1, 2018. Acquisition debt is indebtedness secured by the residence and incurred in the acquisition, construction or substantial improvement of the residence.The exclusion is limited to $2 million ($1 million for married taxpayers filing separately.)

Certain debt used to refinance the debt is also eligible. Debt forgiven on a second home or rental property does not qualify.

Credit card and car loan debt. Noticeably absent from the specific exceptions to COD income are two of the biggest consumer debt items: credit cards and car loans. Credit card debt or an unpaid debt on a car loan that is forgiven by the lender is includable in gross income, unless the debtor is bankrupt or insolvent. The lender will report the amount of forgiven debt on Form 1099-C. If you had debt discharged from income that does, or does not, qualify for an exception, you must include the amount of cancelled debt in your gross income on your tax return. 

Researching charities

Tool on IRS.gov helps taxpayers research charities before making donations

Taxpayers may be able to deduct donations to tax-exempt organizations on their tax return. As people are deciding where to make their donations, the IRS has a tool that may help. Tax Exempt Organization Search on IRS.gov is a tool that allows users to search for charities. It provides information about an organization’s federal tax status and filings.

Four facts about the Tax Exempt Organization Search tool:

  • Donors can use it to confirm an organization is tax exempt and eligible to receive tax-deductible charitable contributions.
  • Users can find out if an organization had its tax-exempt status revoked. A common reason for revocation is when an organization does not file its Form 990-series return for three consecutive years.
  • EO Select Check does not list certain organizations that may be eligible to receive tax-deductible donations, including churches, organizations in a group ruling, and governmental entities.
  • Organizations are listed under the legal name or a “doing business as” name on file with the IRS. No separate listing of common or popular names is searchable.

Taxpayers can also use the Interactive Tax Assistant, Can I Deduct my Charitable Contributions? to help determine if a charitable contribution is deductible.

Taxpayers may also want to decide now if they’ll itemize their deductions when they file next year. Last year’s tax reform legislation made changes to the standard deductions and itemized deductions. Many individuals who formerly itemized may now find it more beneficial to take the standard deduction. So, taxpayers should check their 2017 itemized deductions to make sure they understand what these changes mean to their tax situation for 2018.

More information about these changes is on IRS.gov/taxreform.

How and when to pay estimated taxes

Certain taxpayers must make estimated tax payments throughout the year. Taxpayers must generally pay at least 90 percent of their taxes throughout the year through withholding, estimated tax payments or a combination of the two. If they don’t, they may owe an estimated tax penalty.

For tax-year 2018, the remaining estimated tax payment due dates are Sept. 17, 2018 and Jan. 15, 2019.

Estimated tax is the method used to pay tax on income that is not subject to withholding. This income includes earnings from self-employment, interest, dividends, rents, and alimony. Taxpayers who do not choose to have taxes withheld from other taxable income should also make estimated tax payments. This other income includes unemployment compensation and the taxable part of Social Security benefits.

The IRS urges everyone who works as an employee and who also earns or has income from other sources to perform a Paycheck Checkup now. Doing so will help avoid an unexpected year-end tax bill and possibly a penalty when the taxpayer files their 2018 tax return next year. They can do a checkup using the Withholding Calculator on IRS.gov.

Here are some things to know for taxpayers who make estimated payments:

  • Taxpayers can pay their taxes throughout the year anytime. They must select the tax year and tax type or form when paying electronically.
  • Filers paying by check should make it out to the “United States Treasury” and indicate the tax year and type of taxes they are paying.
  • Taxpayers in presidentially-declared disaster areas may have more time to make these payments without penalty.
  • For easy and secure ways to make estimated tax payments, use is IRS Direct Pay or the Electronic Federal Tax Payment System. IRS.gov/payments has information on all payment options.
  • Taxpayers can find more information about tax withholding and estimated tax at the Pay As You Go page IRS.gov.
  • Publication 505, Tax Withholding and Estimated Tax, is another resource for taxpayers. Publication 505 has worksheets and examples, which can help taxpayers determine whether they should pay estimated tax.

More Information:
Form 1040-ES, Estimated Tax for Individuals
Tax Reform

Dos and Don’ts for Taxpayers Who Get a Letter from the IRS

Every year the IRS mails millions of letters to taxpayers for many reasons. Here are some tips and suggestions for taxpayers who receive one:

  • Don’t ignore it. Most IRS letters and notices are about federal tax returns or tax accounts. Each notice deals with a specific issue and includes specific instructions on what to do.
  • Don’t panic. The IRS and its authorized private collection agencies do send letters by mail. Most of the time all the taxpayer needs to do is read the letter carefully and take the appropriate action.
  • Do take timely action. A notice may reference changes to a taxpayer’s account, taxes owed, a payment request or a specific issue on a tax return. Taking action timely could minimize additional interest and penalty charges.
  • Do review the information. If a letter is about a changed or corrected tax return, the taxpayer should review the information and compare it with the original return. If the taxpayer agrees, they should make notes about the corrections on their personal copy of the tax return, and keep it for their records.
  • Don’t reply unless instructed to do so. There is usually no need for a taxpayer to reply to a notice unless specifically instructed to do so. On the other hand, taxpayers who owe should reply with a payment. IRS.gov has information about payment options.
  • Do respond to a disputed notice. If a taxpayer does not agree with the IRS, they should mail a letter explaining why they dispute the notice. They should mail it to the address on the contact stub at the bottom of the notice. The taxpayer should include information and documents for the IRS to review when considering the dispute. The taxpayer should allow at least 30 days for the IRS to respond.
  • Do remember that there is usually no need to call the IRS. If a taxpayer must contact the IRS by phone, they should use the number in the upper right-hand corner of the notice. The taxpayer should have a copy of the tax return and letter when calling.
  • Do avoid scams. The IRS will never initiate contact using social media or text message. The first contact from the IRS usually comes in the mail. Taxpayers who are unsure if they owe money to the IRS can view their tax account information on IRS.gov.

Establishing Profit Motive for Business Activities

If you reported losses from one or more business activities, we would like to remind you that the IRS has rules that limit the deductibility of expenses and losses from a hobby or activity not engaged in for profit.


If the IRS determines that an activity is not profit-driven, deductions from the activity are limited to the amount of income the activity generates. Losses from such activities cannot be used to offset other income, such as salary or investments.

 

You must be prepared to show that an activity that generates deductions is a business from which you intend to profit. It is not necessary that the activity actually earns a profit, so long as a profit is one of the motives for participating in the activity.

 

The IRS assumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year, or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses. Otherwise, the IRS applies non-exclusive tests and factors to the surrounding facts to judge whether activities are more like a business with a profit motive, or are for personal satisfaction.

 

To make sure you are properly claiming all of the deductions available to you, and to strengthen your position in the event of an IRS audit, it is important to consider all the facts and circumstances surrounding activities the IRS is likely to challenge.

Tax Consequences for Self-Employed Individuals

Owning your own business can be very rewarding, both personally and financially. Being the sole decision-maker for this important undertaking can also be overwhelming.

Business owners have many choices to make, and these decisions involve tax consequences that are not always foreseen. We can help you minimize your overall tax burden by identifying and maximizing business deductions, providing guidance on substantiation of expenses, and exploring tax planning alternatives that are uniquely available to the self-employed.

Some frequently overlooked business expenses that you may be able to deduct include moving expenses, costs of travel away from home, entertainment expenses, and expenses related to a home office. Code Sec. 179 expense allowances on the purchase of new equipment can provide a significant deduction. In addition, there are multiple benefits when you employ your spouse, child, or other family member in the business.

There are some risks involved in adopting tax positions related to operating a business as an independent contractor. For example, the distinction between employee and independent contractor is an issue the IRS subjects to special scrutiny. As a self-employed individual, you must comply with these rules for yourself or for any workers that you hire.

If you are an employer, you must withhold income and employment taxes from an employee’s income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on a Form 1099-MISC, Miscellaneous Income. Failing to make the right classification, however, could result in additional taxes, interest and penalties.

The IRS offers an amnesty program called the Voluntary Classification Settlement Program (VCSP) to encourage employers to reclassify their workers as employees for employment tax purposes for future tax periods. Under the VCSP, employers are allowed to prospectively treat the workers as employees at a cost that is 10 percent of what is normally owed in a worker misclassification situation.

Complex rules and calculations are involved in many of the planning opportunities that are available to you. We will be happy to review your overall tax scenario in order to maximize your tax savings. Please contact our office at your earliest convenience to make an appointment.

2016 Year-End Tax Planning for Individuals

 

Although tax planning is a 12-month activity, year-end is traditionally the time to review tax strategies from the past and to revise them for the future. Year-end has also become a time when there is an increasing need to take a careful look at what’s changed within the tax law itself since the beginning of the year. Opportunities and pitfalls within these recent changes – as they impact each taxpayer’s unique situation—should not be overlooked. This is particularly the case during year-end 2016. Here are some of the many consideration that taxpayers should review as year-end 2016 approaches.

Data, including 2015 return

Year-end planning should start with data collection and a review of prior year returns. This includes losses or other carry-overs, estimated tax installments, and items that were unusual. Conversations about next year should include review of any plans for significant purchases or dispositions, as well as any possible life changes. Alternative minimum tax liability also needs to be explored as well as potential liability for the net investment income tax and the Additional Medicare Tax.

Investments

Taxpayers holding investments toward the end of the year, whether in the form of securities, real estate, collectibles, or other assets, often have an opportunity to reduce their overall tax bill by some strategic buying and selling (or like-kind exchanging). Balancing the existing tax rates within those considerations is part of that challenge: the ordinary income tax rates, the capital gain rates, the net investment income tax rate, and the alternative minimum tax (AMT), all play a role.

Income caps on benefits

Monitoring adjusted gross income (AGI) at year-end can also pay dividends in qualifying for a number of tax benefits. Often tax savings can be realized by lowering income in one year at the expense of realizing a bit more in the other: in this case, either 2016 or 2017. Some of those tax benefits that get phased out depending upon the taxpayer’s AGI level include:

  • itemized deductions
  • personal exemptions
  • education savings bond interest exclusion
  • maximum child’s income on parent’s return (form 8814):
  • medical savings account adjustments
  • education credits
  • student loan interest deduction
  • adoption credits
  • maximum Roth IRA contributions
  • maximum IRA contributions for individuals

PATH Act “extenders” and more

Year to year, the tax law changes; and with it, opportunities and pitfalls that need particular attention at year-end. In many cases, these changes are accounted for based on a tax-year period. Once the current tax year is over, there often is no going back for a “do-over” for a missed opportunity or to correct a costly mistake. Year-end 2016 is no exception to this rule.

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), enacted immediately before the start of 2016, permanently extended many tax incentives that were previously temporary, removing for the first time in many years the year-end concern over whether these incentives will be extended either retroactively for the current year or prospectively into the coming year. Not all of these “extenders” provisions were extended beyond 2016, however; and some were modified in the process. Others were extended for up to five years, deferring to “tax reform” a more lasting solution. Here’s a list of the major changes made by the PATH Act, especially focused on how they impact year-end transactions:

  • permanent American Opportunity Tax Credit
  • permanent teachers’ $250 “classroom” expense deduction
  • permanent state and local sales tax deduction election, in lieu of state income taxes
  • permanent exclusion for direct charitable donation of IRA funds of up to $100,000
  • permanent 100-percent gain exclusion on qualified small business stock
  • permanent conservation contributions benefits
  • five-year solar energy property
  • non-business energy property credit through 2016
  • fuel cell motor vehicle credit through 2016
  • mortgage insurance premium deduction through 2016
  • tuition and fees deduction through 2016

Life events

Life events such as marriage, birth or adoption of a child, a new job or the loss of a job, and retirement, all impact year-end tax planning. A change in filing status will affect tax liability. The possibility of significant changes and/ or significant or unusual items of income or loss should be part of a year-end tax strategy. Additionally, taxpayers need to take a look into the future, into 2017, and predict, if possible, any events that could trigger significant income, losses or deductions.

Retirement strategies

Taxpayers may want to take a look at a number of different provisions in anticipation of retirement, at the point of retirement, or after retirement. Many of these provisions have opportunities and deadlines associated with the concept of taxable year. Among others, these include contributions to employer plans, strategic use of IRAs and “required minimum distributions,” and timing Roth IRA conversions and reconversions to maximize your retirement nest egg.

Affordable Care Act compliance

The Affordable Care Act (ACA) imposes new requirements on individuals and tightens or eliminates some tax incentives. Year-end planning for individuals with regards to the ACA may generally be more prospective than retrospective but there are some year-end moves that may be valuable, particularly with health-related expenditures.

Acceleration or delay

Year-end tax planning, especially if done “at the eleventh hour,” requires some understanding of the timing rules: when income becomes taxable and when it may be deferred; and, likewise, when a deduction or credit is realized and when it may be deferred into next year or beyond.

Income acceleration/deferral. Taxpayers using the cash method basis of accounting can defer or accelerate income using a variety of strategies. These may include:

  • sell appreciated assets
  • receive bonuses before January
  • sell outstanding installment contracts
  • redeem U.S. Savings Bonds
  • accelerate debt forgiveness income
  • avoid mandatory like-kind exchange treatment

Deduction acceleration/deferral. A cash basis taxpayer generally deducts an expense in the year it is paid, although prepayment of an expense generally will not accelerate a deduction. There are exceptions, including those made in connection with:

  • January mortgage payment in December
  • tuition prepayment
  • estimated state taxes

A New Administration

When the new Administration moves into Washington in January 2017, it is clear that changes will follow. How these changes will impact upon your long-term tax situation remains to be developed. That, and an eventual groundswell for tax reform, make the future more difficult to read than in prior years. Nevertheless, in looking toward the future, you should not lose sight of the short-term tax dollars to be saved immediately through 2016 year-end strategies.

Our tax laws operate largely within the confines of “the taxable year.” Once 2016 is over, tax savings that are specific to 2016 may be gone forever.

October Tax Insight Newsletter

October Newsletter — All about the Amended Tax Return.  Sometimes it is necessary to make changes to a return after you file it… this is where an amended return comes in. Find out more in this month’s newsletter!

September Newsletter — IP PIN

August Newsletter — Deductions

July Newsletter — Mid-Year Tax Planning

June Newsletter — Home Sales

Tax Effects of Divorce or Separation

If you are divorcing or recently divorced, taxes may be the last thing on your mind. However, these events can have a big impact on your wallet. Alimony and a name or address change are just a few items you may need to consider. Here are some key tax tips to keep in mind:

  • Child Support. Child support payments are not deductible and if you received child support, it is not taxable.
  • Alimony Paid. You can deduct alimony paid to or for a spouse or former spouse under a divorce or separation decree, regardless of whether you itemize deductions. Voluntary payments made outside a divorce or separation decree are not deductible. You must enter your spouse’s Social Security Number or Individual Taxpayer Identification Number on your Form 1040 when you file.
  • Alimony Received. If you get alimony from your spouse or former spouse, it is taxable in the year you get it. Alimony is not subject to tax withholding so you may need to increase the tax you pay during the year to avoid a penalty. To do this, you can make estimated tax payments or increase the amount of tax withheld from your wages.
  • Spousal IRA. If you get a final decree of divorce or separate maintenance by the end of your tax year, you can’t deduct contributions you make to your former spouse’s traditional IRA. You may be able to deduct contributions you make to your own traditional IRA.
  • Name Changes. If you change your name after your divorce, be sure to notify the Social Security Administration. File Form SS-5, Application for a Social Security Card. You can get the form on SSA.gov or call 800-772-1213 to order it. The name on your tax return must match SSA records. A name mismatch can cause problems in the processing of your return and may delay your refund. Health Care Law Considerations.
  • Special Marketplace Enrollment Period. If you lose health insurance coverage due to divorce, you are still required to have coverage for every month of the year for yourself and the dependents you can claim on your tax return. You may enroll in health coverage through the Health Insurance Marketplace during a Special Enrollment Period, if you lose coverage due to a divorce.
  • Changes in Circumstances. If you purchase health insurance coverage through the Health Insurance Marketplace, you may get advance payments of the premium tax credit. If you do, you should report changes in circumstances to your Marketplace throughout the year. These changes include a change in marital status, a name change, a change of address, and a change in your income or family size. Reporting these changes will help make sure that you get the proper type and amount of financial assistance. This will also help you avoid getting too much or too little credit in advance.
  • Shared Policy Allocation. If you divorced or are legally separated during the tax year and are enrolled in the same qualified health plan, you and your former spouse must allocate policy amounts on your separate tax returns to figure your premium tax credit and reconcile any advance payments made on your behalf. Publication 974, Premium Tax Credit, has more information about the Shared Policy Allocation. For more on this topic, see Publication 504, Divorced or Separated Individuals.

SOURCE:  IRS Summertime Tax Tip 2016-23

How Selling Your Home Can Impact Your Taxes

Usually, profits you earn are taxable. However, if you sell your home, you may not have to pay taxes on the money you gain. Here are ten tips to keep in mind if you sell your home this year.

1. Exclusion of Gain. You may be able to exclude part or all of the gain from the sale of your home. This rule may apply if you meet the eligibility test. Parts of the test involve your ownership and use of the home. You must have owned and used it as your main home for at least two out of the five years before the date of sale.

2. Exceptions May Apply. There are exceptions to the ownership, use and other rules. One exception applies to persons with a disability. Another applies to certain members of the military. That rule includes certain government and Peace Corps workers. For more on this topic, see Publication523 , Selling Your Home.

3. Exclusion Limit. The most gain you can exclude from tax is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.

4. May Not Need to Report Sale. If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.

5. When You Must Report the Sale. You must report the sale on your tax return if you can’t exclude all or part of the gain. You must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds From Real Estate Transactions.

6. Exclusion Frequency Limit. Generally, you may exclude the gain from the sale of your main home only once every two years. Some exceptions may apply to this rule.

7. Only a Main Home Qualifies. If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.

8. First-time Homebuyer Credit. If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale. For more on those rules, see Publication 523.

9. Home Sold at a Loss. If you sell your main home at a loss, you can’t deduct the loss on your tax return.

10. Report Your Address Change. After you sell your home and move, update your address with the IRS.